The factors that drove life back into the art market last year should continue to sustain prices into 2018, and induce collectors to sell treasured works, despite bumps in the road created by volatile stock markets this past week and a quietly made change to the U.S. federal tax code that could affect big-ticket deals.

Global wealth generated by strengthening economies in China and the Eurozone as well as the U.S., helped fuel a booming art market in 2017, leading to a 25% gain in auction sales and eye-popping prices, most notably the $450.3 million price paid for Leonardo da Vinci’s Salvator Mundi, reportedly by Saudi Crown Prince Mohammed bin Salman. Last week Christie’s reported total 2017 results, including private and online sales, of $6.6 billion, a 26% increase from the previous year; Sotheby’s has yet to report total sales, but its auction results were up 13.1% last year to $4.7 billion.

While global stock market volatility this week may give some collectors pause, many have benefited from strength in financial markets over recent years, particularly in the U.S., and have shown a willingness to deploy their disposable income into art.

“The wealth effect is a huge driver” of the art market, says Evan Beard, National Art Services Executive at U.S. Trust.

Collectors who are entrepreneurs will likely get another financial boost this year from more favorable tax treatment provided by the new U.S. law for passthrough entities, such as the partnerships and S corporations that many entrepreneurs utilize. “Tax reform is a big, big boon to them,” Beard says.

But a less-publicized tweak to the tax code could slow big-ticket sales. Many collectors used a provision originally created for real estate, known as a 1031 “like-kind” exchange, to sell expensive works of art. That’s because the tax code allowed collectors who owned art as an investment, not just for personal use, to sell a work and defer capital gains taxes and associated income taxes if they subsequently bought a similar work, also as an investment, says Micaela Saviano, Deloitte Tax’s art and finance practice leader.

Although the exchange was originally created for real estate investors, a “couple of enterprising real estate developers applied to this to art,” Beard says. But the new law “limits the ability to execute like-kind exchanges to real property (like real estate), which does not include tangible property such as art,” Saviano says.

Given this like-kind exchange of art was a “real driver” of many big-ticket transactions, “the elimination...is sand in the gears of these mega transactions,” Beard says. “It will be interesting to see if that slows things down.”

Collectors who own top-tier works, and don’t need to sell, often feel they are better off keeping a percentage of their wealth in art, says Suzanne Gyorgy, global head, art advisory & finance at Citi Private Bank. The U.S. administration’s “decision to remove the use of 1031 like-kind exchanges for art in the new tax plan could further limit the supply of top-quality works coming to auction.”

Of course, an optimistic outlook for the art market has already spurred collectors to bring high quality works to auction this year. Sotheby’s, for instance, is offering a monumental oil-on-canvas painting by Pablo Picasso, Le Matador, at its Feb. 28 evening auction of Impressionist and modern art, for an estimated price between $19.5 million and $25 million.

Most notable is Christie’s May sale of the collection of David and Peggy Rockefeller, featuring seminal works by Pablo Picasso, Claude Monet, and Georgia O’Keeffe, among many others, as well as furniture and decorative arts from America, Europe and Asia. The collection is estimated to sell for more than $500 million, with the proceeds going to charities the couple supported during their lifetime.

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Fueled by Global Economy, Art Market Could Continue Boom in 2018

The factors that drove life back into the art market last year should continue to sustain prices into 2018, and induce collectors to sell treasured works, despite bumps in the road created by volatile stock markets this past week and a quietly made change to the U.

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